Federal Estate Taxes Due Upon Death

The federal government has traditionally imposed federal estate taxes (called death taxes by opponents) above a certain amount. 

For people who died in 2025 the federal estate tax applies only to estates larger than $13,990,000 for individuals and twice that amount for married couples. Nevada does not have any taxes on estates or estate income or on inheritance. CAUTION: What items are part of the estate for federal estate tax purposes is DIFFERENT THAN what items are part of the probate estate under state probate procedures. For example, Dad has a $50,000,000 brokerage account at Charles Schwab which is payable on death to his kids. This account does not go through probate, but there would be federal estate tax on this large amount. If you are concerned about federal estate tax liability and ways to minimize federal estate taxes you need a personal consultation with a tax lawyer.

THREE ADDITIONAL THINGS NEED TO BE CLARIFIED:

1) Estate income taxes are different than estate taxes. If Mom dies and has a brokerage account earning interest and dividend income during the time between her death and the distribution of her assets, the income from her assets is taxed if they are more than $600 a year. If you think about it, this makes sense: Mom leaves you bonds paying $60,000 a year in taxable interest. You can't avoid taxes on this interest by dragging out the probate process. 

2) If the estate owns IRAs or 401(k)s or other assets which went into the Decedent's name without the Decedent having paid taxes on the money that went in, thenn the IRS will want taxes on the money when it is distributed to the estate's beneficiaries, unless under certain rules, they are rolled into a tax deferred account of the beneficiary. 

3) In many cases transactions must be reported to the IRS even if there is no tax to be paid. For example, Mom dies and leaves a house worth $400,000 and $100,000 in financial accounts. There is no federal estate tax due. BUT, the sale of Mom's house must be reported to the IRS. (This is because the IRS doesn't know whether Mom's estate include 1 or 50 houses--maybe she was a big time landlord.) If the estate includes real estate that will be sold, the escrow and/or title company will require an EIN. EIN stands for Employee Identification Number. (This is a misleading name.) The executor or the administrator of the estate can go to irs.gov and apply online for an EIN for the estate. (The IRS does NOT charge a fee and if there is a demand for a fee you are NOT on the IRS website.) The application should be made when you are connected to a printer so you can print out the EIN letter at the end of the application process. You will be asked for the Decedent SS#, and your SS#. You will be asked if the estate has any employees and the answer is NO, unless you have hired people specifically to work on the estate and are paying them a salary--this does not include people (independent contractors) you might hire to fix up the estate's house or sell the estate's house, or prepare the estate's income tax report.

In contrast to the federal estate tax which is the I.R.S. cut before the estate moves on to the heirs, and which most estates are small enough to escape, estates that earn more than $600 in a year face an income tax. The period during which an estate may be liable for the income tax is from the date of death of the decedent until the estate is distributed. Many estates never earn $600 in a year. For example, the estate could consist of a house that is never rented and never earns income. Or it could consist of bank accounts that at today's low interest rates don't pay interest equal to $600 a year or more. If the estate earns more than $600/yr. there are two options. First, the estate can pay the income tax by filing a 1041. If there are many heirs, this may be the most efficient way to go for all concerned. Or, the estate can file the 1041 and a K-1 stating what portion of the income tax each heir is liable for and that the tax liability passes on to the heirs. If there is only one or two heirs this may be the most efficient way to go. This is a question to be discussed with a tax accountant.

Suppose someone dies in April of 2014. The personal representative of the estate will have to determine if the decedent filed a 2013 tax, if not, the personal representative will have to get one filed. If the decedent had enough income to be subject to income tax in the part of 2014 that he lived, then a Decedent's tax return from 2014 will also have to be filed. Depending on the complexity of the return and the ability of the personal representative, either the personal representative can do that or they can hire a tax accountant.

Money in a traditional IRA (not a Roth IRA) is earned income that has escaped being taxed at the time it was earned. Also, interest, dividends, and capital gains earned within the IRA escape taxation until the money is taken out of the IRA. In a sense money in a traditional IRA comes with a built in tax lien. If a person takes this money out during their lifetime, they pay tax on the withdrawals as if the withdrawals were regular income. If a person dies with money in a traditional IRA and the IRA is paid out upon the person's death, tax is due on the IRA money as if though it were earned income.

Typically, IRAs are set up with a primary and a secondary beneficiary. These beneficiaries (the primary one if alive, otherwise the secondary beneficiary) may be able to roll over the IRA money of the dead person into their own IRA and thereby avoid immediately paying taxes on the IRA money. However, if a trust is the beneficiary of the IRA the tax on the IRA money may become due at distribution to the trust. On the other hand, there can be valid reasons for making the trust either the primary or secondary beneficiary. These include:

  1. If a minor is the beneficiary, a trust allows for control of the minor's money past the minor turning 18 and many clients desire this.
  2. If the primary and secondary beneficiaries die before the owner of the traditional IRA, the money in the traditional IRA will have to be probated at some expense and time delay.

In addition, the tax benefits of being able to roll over an IRA may or may not exist. The beneficiary may need the money immediately in which case there is no roll over. But, also, when the IRA money comes out it is taxed as ordinary income (unless there is an additional penalty for early withdrawal). The potentially lower tax rates on dividend and capital gain income is lost for a traditional IRA.

In conclusion, whether to put a traditional IRA into a trust is a very complicated matter that depends in part upon future events that cannot be predicted.

Note on Calculating Estate Federal Income Taxes:

If the Estate will have federal Income Tax liability, the Executor or Administrator will have to get a federal tax number which is misleadingly called an EIN which are the first initials for Employee Identification Number. When applying online for this EIN the applicant will be asked what the tax year of the estate is. Often the best choice is to begin the year on the date of death. For example, the Decedent died on September 8, 2022. The estate has income producing assets and it won't be possible to get all of the assets of the estate distributed by December 31, 2022, but it will be possible to get all of the estate assets distributed within a year of the death. If the calendar year is used the Estate will have to file 2022 and 2023 Income Tax returns. If the tax year of the estate begins on the date of death, then only one Income Tax return will have to be filed, saving on tax preparation time and fees.

Timeshare Company Transfer Fees:

In addition to the expense of a Timeshare Probate the timeshare company usually charges a fee of $50 to $600 to record the transfer. This is why we encourage people to take title to timeshares as joint tenants with people they are likely to leave the timeshare to.